Top 10 Tax Planning Strategies to Maximize Your Savings

In 2020, the IRS issued over 126 million refunds, accounting for 74% of all tax returns filed.¹ Considering the vast majority of Americans are still overpaying in taxes, now is the time to plan ahead. At Calamita Wealth Management, we strive to ensure our clients are getting the most out of their money. We do not want our clients paying more than they should. In this guide, we’ll explore the top 10 tax-planning strategies you can use to maximize your net worth.

1. Maximize Your Retirement Plan Contributions

One of the best ways to minimize your tax liability is to maximize your retirement plan contributions. This is one of our top 10 tax planning strategies. Depending on your unique situation, you may be able to consider one or more of the following tax-advantaged accounts:

• 401(k), 403(b), and 457 Plans: These accounts allow you to contribute up to $20,500 annually in 2022 ($27,000 if over age 50).² Contributions deduct automatically from your paycheck, meaning they won’t show up as part of your annual income. This is a great way to defer taxes until your retirement years when you could potentially be in a lower tax bracket.

• Traditional IRA: Contributing to a traditional IRA is another way to reduce your tax liability if your income is within certain limits.³ The 2022 contribution limit for traditional IRAs is $6,000 with additional $1,000 catch-up contributions for individuals over the age of 50.⁴ Contributions can be made until the April 15th tax filing deadline.

• Roth IRA: This is an attractive savings vehicle for many reasons, including no required minimum distributions (RMDs), tax-free withdrawals after age 59½, and the ability to pass wealth tax-free to your heirs. Unfortunately, Roth IRAs have income restrictions and you may not be able to open an account outright if you are above certain limits.⁵

• Solo 401(k): Self-employed persons and business owners with no employees can contribute up to $69,000 in 2024 to a Solo 401(k).⁶ Like other types of 401(k) plans, these contributions will reduce your current-year taxable income but would be taxed upon distribution in retirement. [Text Wrapping Break]

2. Utilize Roth Conversions

Are you outside of the income eligibility threshold for Roth IRAs but still want to take advantage of the Roth tax benefits? Then one of the three Roth conversion strategies below could be the right for you.

The first strategy works by paying the income tax on your IRA dollars and converting the funds to a Roth IRA. The optimal time to consider this strategy is after you retire but prior to taking social security or RMD’s. It’s often best done over a series of years to maximize a tax bracket without being pushed into a higher one.

The second Roth conversion option is the mega backdoor Roth. With the mega backdoor Roth, you convert a portion of your 401(k) plan to Roth dollars. In this strategy, you would maximize your after-tax (non-Roth) contributions (up to $40,500 in 2022), then roll over this after-tax portion to your Roth IRA or the Roth component of your 401(k).

The third conversion strategy is the backdoor Roth IRA which works by making an after-tax contribution to your traditional IRA and immediately converting the funds to a Roth IRA. This strategy is optimal if you don’t have an IRA set up yet.

All three Roth conversion strategies will allow the contributions to grow completely tax-free and allow you to avoid future RMDs. All are helpful if you expect to be in a higher tax bracket in the future.

3. Contribute to a Health Savings Account

Another one of our top 10 tax planning strategies is contributing to a health savings account. Health savings accounts (HSA) offer triple tax savings. You can contribute pre-tax dollars, pay no taxes on earnings, and withdraw the money tax-free to pay for medical expenses. Unused funds roll over each year and can be withdrawn without penalty. This is for non-medical expenses at age 65, essentially becoming an IRA. You must show enrollment in a high-deductible health plan in order to qualify for an HSA.

HSAs can be a great tax-management tool if you are able to pay medical expenses out of pocket and leave the HSA funds to earn tax-free growth. The 2024 IRS contribution limits for HSAs are $4,150 for individuals and $8,300 for families.⁷ If you are 55 or older, you may also be able to make catch-up contributions of $1,000 per year.⁸ You have until April 15th for your contributions to count for the previous year’s tax return.

4. Contribute to a Donor-Advised Fund

If you itemize your tax deductions because of charitable contributions, you may want to consider investing in a donor-advised fund (DAF). You can contribute a lump sum all at once and then distribute those funds to various charities over several years. With this strategy, you can itemize deductions when you make the initial contribution. Then you can take the standard deduction in the following years, allowing you to make the most out of your donation tax-wise.

You can also donate appreciated stock, which can further maximize your tax savings. By donating the appreciated position, you avoid paying the capital gain tax that would have been due upon sale of the stock. If you want to keep the position for the long term and avoid the capital gain tax, you can donate the stock. You can then repurchase it using the cash you would have otherwise contributed. This effectively resets your cost basis to the current price of the stock. It also allows you to delay taxes until the future.

5. Make a Qualified Charitable Donation

If you own a qualified retirement account and are at least 70½, you can use a qualified charitable distribution (QCD) to receive a tax benefit for your charitable giving, and since this is an above-the-line deduction, it can be used in conjunction with other charitable tax strategies. A QCD is a distribution made from your retirement account directly to your charity of choice. It can also count toward your RMD when you turn age 73, but unlike RMDs, it won’t count toward your taxable income.

6. Harvest Capital Losses

Tax-loss harvesting involves selling investments at a loss in order to offset the gains in your portfolio. By realizing a capital loss, you are able to counterbalance the taxes owed on capital gains. The investments that are sold are usually replaced with similar securities in order to maintain the desired asset allocation and expected return.

For example, if you are expecting a large capital gain in the current year, you may want to harvest some of your losses by selling underperforming stocks to offset the gain. Keep in mind that you will need to wait 31 days before buying back the position. This is in order to avoid the Wash-Sale Rule, which would disallow the loss.⁹ One risk with this strategy is that the stock could increase in price during the 31 days you don’t own it. To avoid this, consider investing in an index fund, like the S&P 500 ETF, in order to capture any market upsides during that time period. This can be a great way to make the most out of a losing situation. Use an investment loss to offset the capital gains tax on your investment income.

Tax-loss harvesting can also be used to offset your ordinary income tax liability if capital losses exceed capital gains. In this case, up to $3,000 can be deducted from your income, and capital losses in excess of this amount can be carried forward to later tax years.

7. Take a Qualified Business Income Deduction

Business owners involved in partnerships, S corporations, or sole proprietorships can take a qualified business income deduction (QBID) to help reduce taxable income and maximize tax savings. This allows for a maximum deduction of 20% of qualified business income; however, limits apply if your taxable income exceeds a certain threshold.

To qualify without limitation, consider reducing your income below the $191,950 phase-out threshold for individuals or $383,900 for married couples filing jointly.¹⁰ One way to do this is by maximizing your 401(k) and your spouses with any excess cash. If you are the sole employee in your business, you can also consider making a profit-sharing contribution to your retirement account.

8. Consider Estate Tax-Planning Techniques

Estate planning techniques can also be an effective way to reduce current-year tax liability. The gift and estate tax and exemptions increased to $12.06 million for individuals¹¹ and $24.12 million for married filing jointly. The annual gift tax exclusion has also been increased to $18,000 per recipient.¹² This allows a taxpayer to give this amount tax-free without using any of the previously mentioned lifetime exemptions. Not only that, but each taxpayer can give up to $18,000 per person to any number of people. By incorporating annual gifts into your overall tax strategy, you can significantly reduce both your taxable income and your taxable estate over time.

9. Understand Long-Term vs. Short-Term Capital Gains

Understanding the tax implications of long-term versus short-term capital gains can go a long way in reducing your tax liability. For instance, in 2022 a married taxpayer will pay 0% capital gain tax on their long-term capital gains if their taxable income falls below $83,350.¹³ That rate jumps to 15% and 20% for taxable incomes that exceed $83,350 and $517,200, respectively. Short-term gains in nature will endure taxing at your marginal tax bracket, potentially up to 37%! Knowing both the nature of your gain, as well as your tax bracket, is crucial information. This is especially if you want to minimize your tax liability.

10. Make Sure Your Advisory Team Is Working Together

Here are our final top 10 tax planning strategies. Beyond consulting with a tax professional, you’ll want to be sure your entire financial team is working together. You’ll want to provide cohesive oversight and guidance. This should include professionals like CPAs, financial advisors, investment advisors, and estate attorneys. Your finances don’t exist in a bubble and so neither will your tax minimization strategies. When your advisory team works together, strategies are easier to identify and execute. Proactive tax solutions become much easier to implement, reducing stress and your tax bill.

Stop Overpaying Today

Tax planning doesn’t have to be stressful or complicated. At Calamita Wealth Management, we have the tools and expertise to help you navigate these strategies and more. If overpaying in taxes becomes tiresome and you’re on the hunt for creative solutions, we would love to hear from you. If you enjoyed our top 10 tax planning strategies, schedule an introductory phone call using our online calendar. Try reaching out to us at (704) 276-7325 or todd@calamitawealth.com to learn more about how we can help.

About Todd

Todd Calamita is the founder and managing principal of Calamita Wealth Management. This is an independent, fee-only wealth management company located in Charlotte, NC. Calamita Wealth serves people locally and across the country. We focus on providing wealth management solutions to affluent individuals over age 50 and their families. He has more than 20 years of experience in the financial services industry. Todd Calamita is passionate about helping people have a better life. He does this by designing and implementing customized financial plans that bring clarity and confidence.

Todd is a CERTIFIED FINANCIAL PLANNER™ and CERTIFIED DIVORCE FINANCIAL ANALYST® professional. His educational background includes a Bachelor of Business Administration from Ohio University. He also received a Master of Business Administration from the Weatherhead School of Management at Case Western Reserve University. Aside from planning, he authored, Plan Smart: Conquering 10 Common Money Traps, as well as numerous articles on wide-ranging personal finance topics, from taxes to retirement accounts. He featured in a Financial Boot Camp TV series as a volunteer. There he was showing people how to make smart decisions with their money. When he’s not working, you can find Todd spending time with his wife, Teresa, and their two sons, Colin and Cameron. He enjoys rock climbing, swimming, and traveling. Todd even has a black belt in Tang Soo Do, a Korean martial art. To learn more about Todd, connect with him on LinkedIn.

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